Johannesburg, 11 July 2017—Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to First Assurance Company Limited of A(KE), with the outlook accorded as Negative. The rating is valid until June 2018.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating to First Assurance Company Limited (“First Assurance”) based on the following key criteria:

First Assurance’s rating has been placed on negative outlook, owing to earnings registering well below original expectations, with continued profit weakness budgeted to persist going forward. Profitability, having registered within a moderately strong aggregated range in previous review years, weakened substantially in FY16. In this regard, the insurer’s underwriting margin equated to a poor -19% in FY16 (BGT16: 4%), having averaged 4% between FY12 and FY15. The reduction in profitability was spurred in large by a spike in the loss ratios for motor and workmen’s compensation, while a sustained high medical loss ratio continued to suppress margin headroom. Management has budgeted for a further large underwriting deficit in FY17, owing in large to cost pressures, as well as the reducing scale efficiencies. Furthermore, GCR notes the potential for continued elevation in the loss ratio (which management has budgeted to lower substantially to 69% in FY17) to further pressure the underwriting result downward. Consequently, management’s control over earnings capacity represents a primary consideration over the rating horizon.

The insurer’s capitalisation continued to measure at a strong level in FY16. Over the review period, capitalisation grew by a 19% compound annual growth rate, supported by sound retained income and a capital injection in FY15. The international solvency margin equated to a higher 102% at FY16 (FY15: 99 %), underpinned by a reduction in the premium retention rate to 55% at FY16 (FY15: 62%). GCR expects risk adjusted capitalisation to be maintained within a strong level over the rating horizon, supported in part by a lower premium risk base.

GCR views First Assurance’s competitive position to be moderately strong, with a market share of 3.2% in FY16 (FY15: 3.4%). First Assurance’s business mix is fairly well diversified, with four major classes of business contributing 81% of GWP in FY16.

Negative rating action is likely to follow sustained weakness in earnings capacity. In contrast, improved profit stability may see a reversion to a Stable outlook, with capitalisation and liquidity also being sustained at rating-adequate levels.

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

First Assurance Company Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit rating has been disclosed to First Assurance Company Limited with no contestation of the rating.

The information received from First Assurance Company Limited and other reliable third parties to accord the credit rating included:

The audited annual financial statements to 31 December 2016

4 years of comparative financial statements to 31 December

Budgeted financial statements to 31 December 2017

Financial Condition Report at 31 December 2016

Other related documents.

The rating above was solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY

Assets

A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.

Balance Sheet

Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.

Capacity

The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.

Capital

The sum of money that is invested to generate proceeds.

Capitalisation

The provision of capital for a company, or the conversion of income or assets into capital.

Capital Adequacy

A measure of the adequacy of an entity’s capital resources in relation to its risks.

Cash

Funds that can be readily spent or used to meet current obligations.

Claim

A request for payment of a loss, which may come under the terms of an insurance contract.

Deductible

The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.

Diversification

Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.

Dividend

The portion of a company’s after-tax earnings that is distributed to shareholders.

Execution Risk

The risk that a company’s business plans will not be successful when they are put into action.

Exposure

Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.

International Scale Rating LC

International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.

Liabilities

All financial claims, debts or potential losses incurred by an individual or an organisation.

Liquidity

The speed at which assets can be converted to cash. The ability of an insurer to convert its assets into cash to pay claims if necessary. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.

Operating Margin

Measures the efficiency of profit generation from investments and underwriting.

Policy

The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.

Policyholder

The person in actual possession of an insurance policy.

Premium

The price of insurance protection for a specified risk for a specified period of time.

Rating Horizon

The rating outlook period

Reinsurance

The practice whereby one party, called the Reinsurer, in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance, which it has issued. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.

Reserve

An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders.

Risk

The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.

Yield

Percentage return on an investment or security, usually calculated at an annual rate.

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GLOBALRATINGS.NET/UNDERSTANDINGRATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GLOBALRATINGS.NET/RATINGSINFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.